consistently, should give the same overall valuation result and should be capable of reconciliation. However the authors believe that the MCEV approach offers both a more practicable and a more objective basis for carrying out the valuation.

The report of the discussion at the meeting is not yet available but the commentary of one of us who was present was as follows:

‘The focus of this excellent paper is primarily on the new valuation approach with some references to the issues relating to financial reporting. I think in terms of selling this to other professions, which has been commented on, and in particular to the accounting profession and the IASB, there are some issues which need specific attention.

The first of these is the analysis of the change in embedded value from one year to another. How one describes what has contributed to that performance, and how that is analysed, is of course crucial in making this change comparable to the kind of profit and loss accounts that people are familiar with from other businesses. If we think back long enough, when people first became interested in all this at the beginning of the 1990s, a lot of the “accruals” versus embedded value debate was about which method would bring out more clearly from a management and investor perspective the factors that are driving performance.

The second issue is that we do not know where we are with the IASB because at the latest announcement its chairman said "we are starting with a clean slate again". But from previous discussions, one particular issue which was raised in IFRS 4 as a tentative conclusion for the next step was basically that IASB does not like “day one” profits, and if the MCEV method produces day one profits then it is going to have to pass the test which the IASB laid down - which was there has to be very good market evidence. So I think we have to ask what markets is one calibrating to for all the various elements of this embedded value? Some of the markets are clear, the investment markets; other markets in insurance liabilities people have always argued are not deep, liquid and transparent. So we have to be clear exactly what is being calibrated to and how reliable that is.

Finally, I do not understand this ‘locked in capital cost’. You have some capital, some of it you use in your insurance business, some of it let us suppose you have to keep because the regulator says you have to have it, let us suppose that it is all in gilt- edged stock. Why is the value of that gilt-edged stock not its market value? The authors may say that that is because of company frictions. In other words, investors would rather be holding the gilt-edged stock themselves than entrust it to an insurance company investment manager to ruin value for them. Not a very good advertisement for your business. Why do people invest in unit trusts and investment trusts and everything else? Take an investment trust, they stand at discounts to their asset value. They always have done but nobody has ever suggested that you would not use the market values of the assets in the accounts; you would then address elsewhere, as it were, the difference from the price at which the company as a whole trades.

It seemed, when reading the paper, there was some ambiguity about whether the authors believed in locked-in capital cost or not.’